If you have a teenage kid who works, DO NOT give them cash for their birthday or during holidays. Do this instead.

Every now and then, you want to give them a nice gift for your kid’s birthday or during holidays. But then, you think to yourself, they have everything they need, and you can’t think of a nicer gift. So, you buy them either a gift card or just give cash. Then, they spend that money on something you don’t approve of. But, you can’t say anything because that was your “gift”

If your teenage kid is working after school, over the weekend or during school breaks, you may want to help them open a Roth IRA and help them fund it.

What is a Roth IRA?

In a nutshell, a Roth IRA is an Individual Retirement Account that allows a qualified person to contribute after-tax income up to $6,000 per year (in 2019). Both earnings on the account and withdrawals after age 59½ are tax-free.

You might be thinking…. what? 59 1/2? that’s a long time from now for my kid.

I know. It’s a really long time from now. But, I only wish someone told me about this when I was 16. I could’ve had a huge jump start.

As an example, if you had open this account at age 16 and contributed just $2,000 per year and if it grew 8% per year, take a look at the chart below. You would have over one million dollars at age 63…. and it’s tax-free.

Example 1:

Age

Beginning

Contribution

Growth

Ending

16

$0

$2,000

$160

$2,160

17

2,160

2,000

333

4,493

18

4,493

2,000

519

7,012

19

7,012

2,000

721

9,733

20

9,733

2,000

939

12,672

21

12,672

2,000

1,174

15,846

22

15,846

2,000

1,428

19,273

23

19,273

2,000

1,702

22,975

24

22,975

2,000

1,998

26,973

25

26,973

2,000

2,318

31,291

26

31,291

2,000

2,663

35,954

27

35,954

2,000

3,036

40,991

28

40,991

2,000

3,439

46,430

29

46,430

2,000

3,874

52,304

30

52,304

2,000

4,344

58,649

31

58,649

2,000

4,852

65,500

32

65,500

2,000

5,400

72,900

33

72,900

2,000

5,992

80,893

34

80,893

2,000

6,631

89,524

35

89,524

2,000

7,322

98,846

36

98,846

2,000

8,068

108,914

37

108,914

2,000

8,873

119,787

38

119,787

2,000

9,743

131,530

39

131,530

2,000

10,682

144,212

40

144,212

2,000

11,697

157,909

41

157,909

2,000

12,793

172,702

42

172,702

2,000

13,976

188,678

43

188,678

2,000

15,254

205,932

44

205,932

2,000

16,635

224,566

45

224,566

2,000

18,125

244,692

46

244,692

2,000

19,735

266,427

47

266,427

2,000

21,474

289,901

48

289,901

2,000

23,352

315,253

49

315,253

2,000

25,380

342,634

50

342,634

2,000

27,571

372,204

51

372,204

2,000

29,936

404,141

52

404,141

2,000

32,491

438,632

53

438,632

2,000

35,251

475,882

54

475,882

2,000

38,231

516,113

55

516,113

2,000

41,449

559,562

56

559,562

2,000

44,925

606,487

57

606,487

2,000

48,679

657,166

58

657,166

2,000

52,733

711,899

59

711,899

2,000

57,112

771,011

60

771,011

2,000

61,841

834,852

61

834,852

2,000

66,948

903,800

62

903,800

2,000

72,464

978,264

63

978,264

2,000

78,421

1,058,685

64

1,058,685

2,000

84,855

1,145,540

65

1,145,540

2,000

91,803

1,239,344

Here is another example with $6,000 per year and grew 8% per year, take a look at the chart below. You would have over one million dollars at age 49.

Age

Beginning

Contributed

Growth

Ending

16

$0

$6,000

$480

$6,480

17

6,480

6,000

998

13,478

18

13,478

6,000

1,558

21,037

19

21,037

6,000

2,163

29,200

20

29,200

6,000

2,816

38,016

21

38,016

6,000

3,521

47,537

22

47,537

6,000

4,283

57,820

23

57,820

6,000

5,106

68,925

24

68,925

6,000

5,994

80,919

25

80,919

6,000

6,954

93,873

26

93,873

6,000

7,990

107,863

27

107,863

6,000

9,109

122,972

28

122,972

6,000

10,318

139,290

29

139,290

6,000

11,623

156,913

30

156,913

6,000

13,033

175,946

31

175,946

6,000

14,556

196,501

32

196,501

6,000

16,200

218,701

33

218,701

6,000

17,976

242,678

34

242,678

6,000

19,894

268,572

35

268,572

6,000

21,966

296,538

36

296,538

6,000

24,203

326,741

37

326,741

6,000

26,619

359,360

38

359,360

6,000

29,229

394,589

39

394,589

6,000

32,047

432,636

40

432,636

6,000

35,091

473,726

41

473,726

6,000

38,378

518,105

42

518,105

6,000

41,928

566,033

43

566,033

6,000

45,763

617,796

44

617,796

6,000

49,904

673,699

45

673,699

6,000

54,376

734,075

46

734,075

6,000

59,206

799,281

47

799,281

6,000

64,422

869,704

48

869,704

6,000

70,056

945,760

49

945,760

6,000

76,141

1,027,901

50

1,027,901

6,000

82,712

1,116,613

51

1,116,613

6,000

89,809

1,212,422

52

1,212,422

6,000

97,474

1,315,896

53

1,315,896

6,000

105,752

1,427,647

54

1,427,647

6,000

114,692

1,548,339

55

1,548,339

6,000

124,347

1,678,686

56

1,678,686

6,000

134,775

1,819,461

57

1,819,461

6,000

146,037

1,971,498

58

1,971,498

6,000

158,200

2,135,698

59

2,135,698

6,000

171,336

2,313,034

60

2,313,034

6,000

185,523

2,504,556

61

2,504,556

6,000

200,845

2,711,401

62

2,711,401

6,000

217,392

2,934,793

63

2,934,793

6,000

235,263

3,176,056

64

3,176,056

6,000

254,565

3,436,621

65

3,436,621

6,000

275,410

3,718,031

Opening A Roth IRA For Your Kid(s) offers you the chance to sit down and teach the value of saving and investing instead of shouting at them to just clean their room. This would be a great life lesson for them and teaching opportunity for you.

Take these steps in order for you to get started for your kid’s Roth IRA.

Step 1 – Can my child open a Roth IRA? If so how much?

If your child has a qualified income (typically money they earned from working and not from interest they earned from savings or investment accounts), (s)he/ can contribute 100% of earned income or up to $6,000 whichever is less to Roth IRA. Or you can also help contribute up to their limits. So, it doesn’t matter if they contribute with their own money. If they have qualified income, anyone can contribute to their Roth IRA.

Step 2 – Where to open a Roth IRA?

You can open the Roth IRA at a bank, investment brokerage firm, annuity company, mutual fund company or independent advisory firm, etc.